First-tier Tribunal (Tax)

[2010] UKFTT 360 (TC)

TC00642

Appeal number: TC/2009/12908

Capital Gains Tax -- whether property was taxpayer's only or main residence -- Section 222 Capital Gains Act 1992 -- appeal dismissed

FIRST-TIER TRIBUNAL

TAX

MR PAUL FAVELL Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Guy Brannan (Judge) Roberta Johnson (Member)

Sitting in public at Holborn Bars, 138-142 Holborn, London, EC1N 2NQ on 5 July 2010

The Appellant appeared in person

 P M O’Reilly, Presenting Officer, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal against an assessment to capital gains tax issued to the Appellant on 7 May 2008 for the tax year ending 5 April 2004. The issues in this appeal are whether the Appellant is entitled to principal private residence and lettings relief in respect of the disposal by the Appellant of a two-bedroom flat at 90 Washington Road, Worcester Park, Surrey KT4 8JH ("the property") in June 2003.  Both issues turn on whether the property was occupied by the Appellant as his only or main residence during the period January 2001 to November 2001.

Evidence

2.       Both the Appellant and Mrs Susan Behan, HM Inspector of Taxes, gave evidence under oath. Documentary evidence was contained in a bundle provided by the Respondents ("HMRC").

The facts

3.       We found the following facts which were not in dispute.

4.       The Appellant was at times material to this appeal a self-employed market trader, painter and decorator. He submitted his tax return for the year ended 5 April 2004 on 28 December 2004. It contained no information about the disposal of the property or about rental income received in respect of the property. Indeed, his tax returns for tax years ended 5 April 1999 to 5 April 2004 made no mention of the property.

5.       HMRC held information that suggested that the Appellant had disposed of a property on 21 January 2004 and had received rental income in respect of this property.

6.       An enquiry in respect of the tax year ended 5 April 2004 was opened by HMRC on 18 May 2007 under the discovery provisions contained in s  29 Taxes Management Act 1970.

7.       On the 26 June 2007, the Appellant's newly appointed agent, Mr Alan Pearce, replied addressing the capital gains and rental income issues.

8.       Questions relating to rental income had been agreed between the parties and therefore were not in issue in this appeal.

9.       The capital gains tax computation submitted with Mr Pearce’s letter showed a gain of £74,036. The computation claimed relief amounting to £51,256 on the basis that the property had been the Appellant's only or main residence during part of the period of ownership for the purposes of s 222 Taxation of Chargeable Gains Act 1992 ("TCGA"). The relief was calculated by reference to the fraction 36/52. This is because s  223 (3) TCGA provides that where a dwelling house has been an individual's only or main residence the period shall include the last 36 months of the period of ownership.

10.    The computation also included a claim to lettings relief under s 223 (4) TCGA in the amount of £22,780. Broadly, this relief applies where a gain accrues to an individual in respect of a dwelling house which he has occupied as his only or main residence and at any time during his period of ownership the property has been wholly or partly let by him as residential accommodation. The proportionate part of the gain attributable to the period of letting is, in general terms, excluded provided it does not exceed £40,000.

11.    Mr Pearce's letter also confirmed that the property had been transferred to the Appellant's son, Mr Elliott Favell, on 25 June 2003 for an estimated valuation of £135,000. This valuation has been agreed by HMRC and forms the basis of the disposal proceeds in respect of the property for the purposes of computing any capital gain.

12.    It is common ground that the Appellant purchased the property on 1 March 1999 at a purchase price of £59,000.

13.    It is also common ground that certain allowable legal costs were incurred in respect of the purchase and transfer of the property.

Facts in dispute

14.    Both the relief under s 222 TCGA in respect of the property occupied as an individual's only or main residence and lettings relief under s 223 TCGA require that a dwelling house must at some stage during the individual's period of ownership have been that individual's only or main residence. It is this requirement that gives rise to the dispute between the parties. The Appellant says that the property was his only or main residence from January 2001 to November 2001. HMRC dispute this.

15.    In his evidence, the Appellant said that when he bought the property in 1999 his plan was to buy it for his son, Elliott Favell. The property was un-modernised and had to be renovated. The property was then let. In January 2001 the Appellant split with his long-term partner, with whom he had been living at 70 Green Lane, New Malden. He had lived at 70 Green Lane since at least 1996. He moved out of 70 Green Lane and moved into the property, which he occupied until approximately November 2001. The Appellant said that he moved out of the property in approximately November 2001 and moved back into 70 Green Lane with his former partner, whom he subsequently married. When he moved out of the property in approximately November 2001 the property was re-let.

16.    The Appellant said he had no documentary evidence (bills, bank statements, correspondence etc) to show that he had occupied the property. He said that if he had known that this would have been relevant to this dispute he would have done things properly and would have had everything in his name. In a letter received by HMRC in October 2007 from Mr Pearce, it was stated:

“Mr Favell does not have any documentary evidence that he resided in 90 Washington Road as all bills have been destroyed.”

17.    The Appellant produced three letters to support his claim that he had occupied the property as his only or main residence from January 2001 to approximately November 2001. The first two letters were sent to HMRC by Mr Pearce. The covering letter was undated but was received by HMRC on 24 July 2008. The third letter was sent to the Tribunal by the Appellant’s new agents, Fitzgerald Mithia, on 25 March 2010.

18.    The first letter was from Ms Carla Roche. Ms Roche was, according to the Appellant, his tenant at the property until December 2000. The letter, dated 6 July 2008, reads as follows:

“Dear Sir/Madam

This letter is to confirm that I was asked by Mr P Favell to vacate 90 Washington Road in December 2000 as he needed the property for his own use.

If you need any further help in this matter please contact me at the above address [address supplied].

Yours faithfully,

C. Roche”

19.    The second letter was from Mr P J Hollely, now the Appellant's brother-in-law. The letter is undated. The letter reads as follows:

“Dear Sir/Madam

I am writing this letter to confirm that I rented a room at 90 Washington Road from Mr P Favell from around March 2001 untill[sic] November 2001 at a rent of £250.00 per month.

Yours faithfully

PJ Hollely”

20.    The third letter was also from Mr Hollely. The letter was dated 24 March 2010 and reads as follows:

“Dear Sir/Madam

This is to confirm that whilst I was renting a room at 90 Washington Road, Mr Paul Favell was also living there at the time.

Yours sincerely,

PJ Hollely”

21.    The first two letters were in manuscript and the third letter was typewritten.

22.    There were no further statements from Ms Roche or Mr Hollely and neither was called as a witness.

23.    The Appellant, under cross-examination, accepted that when he moved into the property he did not know how long he was going to be staying there. He had moved in when his relationship with his partner had broken down and he did not know, when he moved in, how long the breakdown would last.

24.    The Appellant, again under cross-examination, accepted that he did not notify any official body (e.g. his bank, utilities etc) that he had moved to the property. All his official correspondence continued to be sent to his previous address, 70 Green Lane. The Appellant explained that he did not realise that these sort of questions were going to come up. He had other priorities and difficulties on his mind at the time.

25.    Mrs O'Reilly, for HMRC, did not accept that the property had been the Appellant's only or main residence. If the Appellant had occupied the property it was only on a temporary basis and was not sufficient to constitute residence for the purposes of s 222 TCGA.

26.    Mrs O'Reilly drew attention to the fact that there was no documentary evidence that the Appellant had ever occupied the property. There were no utility bills, bank statements or other official correspondence which showed that the Appellant lived at the property. In fact, no correspondence -- with the exception of the three letters referred to above -- existed to show that the Appellant lived at the property at all. It seemed odd, given the breakdown in the relationship with his partner, that the Appellant permitted his correspondence to be sent to his former address. All bank statements for the relevant period contained the Appellant's address at 70 Green Lane.

27.    As regards the three letters -- one from Ms Roche and two from Mr Hollely -- Mrs O'Reilly pointed out that the letter from Ms Roche and the first letter from Mr Hollely did not in fact say that the Appellant moved into the property. Ms Roche's letter merely noted that the Appellant "needed the property for his own use." It did not say that he lived there. The first letter from Mr Hollely said nothing about the Appellant living at the property. Only the third letter -- the second letter from Mr Hollely -- stated that the Appellant had lived at the property at the time Mr Hollely was renting a room from the Appellant. Read together with his first letter, it appears that Mr Hollely is saying that the Appellant was living at the property from around March 2001 until November 2001.

28.    In her evidence Mrs Behan (the HMRC caseworker with responsibility for the enquiry into the Appellant's 2004 tax return), said that she had contacted Sutton Council and enquired about Council tax for the property. The council informed Mrs Behan that Mr Elliott Flavell had been responsible for paying the Council tax for the following periods:

“20 January 2001 to 22 July 2001 -- no discounts claimed

23rd of July 2001 to 30 August 2001 -- single person discount

1 October 2003 to 30 January 2004 -- empty and unfurnished”

29.    Mrs Behan pointed out that although a single person discount for council tax purposes was claimed for a period of approximately five weeks commencing  on 23 July 2001, that was for a period where the Appellant and Mr Hollely were both claiming to have occupied the property.

30.    Mrs Behan had made enquiries about the electoral roll. Throughout 2001 the Appellant's address on the electoral roll was 70 Green Lane.

31.    Mrs Behan also gave evidence that information from the London Borough of Sutton showed that housing benefit was paid by them in respect of tenants at the property and shows the payee as Mr Paul Favell and his address as 70 Green Lane. A statement from the London Borough of Sutton was produced which showed that housing benefit was paid in respect of a tenant, Francesca Chapman, commencing 1 September 2001 for the property. This was at a time when, according to the Appellant and according to Mr Hollely's letters, the Appellant and Mr Hollely were living at the property.

32.    At this point in Mrs Behan's evidence, the Appellant accepted that he may have been mistaken on the date on which he moved out of the property. On reflection, he thought he may have moved out in August 2001.

33.    Mrs O'Reilly referred to a telephone attendance note made by Mrs Behan recording a telephone conversation with the Appellant on 16 May 2008. The note reads as follows:

“Spoke to Mr Favell -- we discussed case. Mr Favell adamant that he lived there -- I said I had no evidence of this -- I asked him who he had told -- he said no one -- he did not know that the move was permanent -- he had moved out because of difficulties at home. I said he must appeal if he did not agree with my assessments.”

HMRC submissions

34.    Mrs O'Reilly submitted that the burden of proof lay with the Appellant to show that the property had been his only or main residence.

35.    Mrs O'Reilly submitted that the Appellant has failed to discharge the burden of proof. There was no reliable evidence that the Appellant had occupied the property. Such records as there were indicated that the Appellant continued to reside at 70 Green Lane during the relevant period and not at the property.

36.    Even if the Appellant had stayed at the property between January 2001 and August (or November) 2001 Mrs Riley argued, in the alternative, that the Appellant's occupation of the property was of a merely temporary nature and was not sufficient to constitute "residence" for the purposes of s. 222 TCGA. Mrs Riley referred to the decision of the Court of Appeal in Goodwin v Curtis [1998] STC 475. In that case the taxpayer had moved out of the family home, on separating with his wife, and moved into a nine bedroom farmhouse which he also owned. The taxpayer had previously put the farmhouse on the market for sale. The taxpayer lived in the farmhouse for approximately five weeks, before moving into another house that he owned, when the farmhouse was sold. The taxpayer claimed that the farmhouse had been his only or main residence. The Court of Appeal upheld the decisions of the General Commissioners and the High Court in dismissing the taxpayer's appeal.

37.    Millett LJ said at 480:

“It was submitted to us that the test which the commissioners applied, namely that residence denotes some degree of permanence, some degree of continuity or some expectation of continuity, was in the wrong test....

The question was whether, during the five weeks or so when the taxpayer occupied the farmhouse, he occupied it as temporary accommodation or as his settled abode, as his "residence". The commissioners found that he occupied it as temporary accommodation.... [T]hey came to the conclusion that he was in temporary occupation and not in residence.

In my judgment, there was ample evidence to support this conclusion. The taxpayer had just separated from his wife and family. He had nowhere else to live. The farmhouse had nine bedrooms and was hardly a suitable home for a single man. It had already been placed on the market. The taxpayer's occupation was manifestly a stop-gap measure pending the completion of his purchase of somewhere else to live….

Temporary occupation at an address does not make a man resident there. The question whether the occupation is sufficient to make him resident is one of fact and degree of the commissioners to decide.

The substance of the commissioners’ finding taken as a whole, in my judgment, is that the nature, quality, length and circumstances of the taxpayer's occupation of the farmhouse did not make his occupation qualify as residence. This conclusion was, in my judgment, clearly open to them.”

38.    Schiemann LJ said at 481;

“I accepted, as did the commissioners, the Crown's contention that in order to qualify for the relief a taxpayer must provide some evidence that his residence in the property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

39.    Mrs O'Reilly referred to the telephone attendance note of 16 May 2008. This showed, in her submission, that the Appellant did not have the necessary expectation of continuity of occupation to establish residence for the relevant statutory purpose.

Our decision

40.    We have decided that the Appellant has not discharged the burden of proof required to demonstrate that he occupied the property as his only or main residence during 2001 or at any other time. There is a complete absence of objective documentary evidence to show that the Appellant resided at the property. In the context of the breakdown of a relationship, we would have expected the Appellant to have notified third parties (such as his bank, utilities and his local council) that he had changed his address. In addition, there are inconsistencies between the statements made by the Appellant and Mr Hollely, such as the date on which housing benefit was paid to Ms Francesca Chapman, which cast doubt on the accuracy of statements made by the Appellant and Mr Hollely in his letters. In short, we are not satisfied that the Appellant occupied the property between January 2001 and August 2001.

41.    In the light of our decision in the preceding paragraph, it is unnecessary for us to decide whether the Appellant had a sufficient expectation of continuity to establish residence at, rather than temporary occupation of, the property.  The facts in Goodwin v Curtis were extreme. It was plain that the occupation of the farmhouse was merely temporary or, as Millett LJ put it, a "stop-gap". In this case, there were no factors of which we were aware that indicated that the breakdown in the Appellant's relationship was likely to be only temporary. Moreover, if the Appellant had been able to demonstrate that he had occupied the property from January to August 2001 we would have been minded to hold that such occupation would have amounted to residence for the purposes of s 222 TCGA. However, the point does not arise for decision.

42.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

GUY BRANNAN

TRIBUNAL JUDGE

RELEASE DATE: 4 August 2010